Goldman's Wilson favors US tech and German fiscal plays

For traders, the standout is positioning data. With hedge fund net exposure near the bottom of a multi-year range, a benign CPI reading or progress in the Iran conflict could quickly drive investors back into stocks, intensifying any rally. In Europe, the strong negative correlation between equities and Bund yields means an energy-driven inflation scare would hit both stocks and bonds, making gas storage ahead of winter as important as oil prices for European equities. The French-German bond yield spread is expected to stay a gauge of eurozone political risk through next year's presidential election, potentially weighing on the euro and French banks. Oil and gas are the main swing factors determining whether Europe's discount narrows.

According to Wilson at Goldman Sachs, investors who have slashed risk are confronting a market where earnings continue to grow quickly and valuations have already declined.

Key points:

• Mark Wilson, Goldman Sachs' head of European equities franchise sales and hedge fund coverage, recommends going long on US megacap tech and a basket of German fiscal spending beneficiaries.
• Europe is more exposed than the US to the energy shock, he noted, with European stocks and 10-year Bund yields showing a more negative correlation than at any point since the 1990s.
• Hedge fund net equity exposure has been reduced to multi-year lows due to higher rates and other uncertainties.
• Wilson expects US third-quarter earnings growth of about 27%, likely the peak, while Europe will grow around 22% in the second half, or 15% excluding energy.
• Clients are watching the French-German bond yield spread and European gas inventories as winter approaches.
• He is monitoring US CPI, a potential resolution in the Iran conflict ahead of the US midterms, and third-quarter earnings.

Mark Wilson of Goldman Sachs favors US megacap technology stocks and German companies that stand to gain from fiscal spending. He argues that strong earnings growth and reduced valuations create a favorable setup even with higher bond yields and energy prices.

In an interview released by the bank, Wilson, who heads European equities franchise sales and hedge fund coverage at Goldman Sachs, stated that Europe is more susceptible than the US to the energy shock due to higher inflationary pressure. Over a six-month period, European stocks and 10-year German Bund yields have a correlation of roughly minus 70%, an inverse relationship unseen since the 1990s, which he called a regime shift. Natural gas is as worrying as oil for Europe, he added, and clients are monitoring gas inventories closely as winter nears.

Clients are also paying attention to France, where the yield spread between French and German government bonds has widened significantly due to political tensions over the budget. Wilson expects this issue to persist in markets in the months before the French presidential election in the first half of next year.

Higher interest rates have prompted a rational de-rating of equities in both the US and Europe, according to Wilson, with rate-sensitive sectors like European renewables falling more than 20%. Investors have reduced risk considerably. Net exposure among US fundamental long-short hedge funds is near the bottom of its one-year range and in the lowest few percent of its three- and five-year ranges, while global funds are in the bottom tenth of their ranges.

Wilson dismissed the idea that Europe is a value trap. He conceded that higher energy costs are a genuine competitive headwind visible in company results, but noted that Europe already trades at a discount, partly accounting for that, and has matched the US's performance this year. He highlighted investment themes in rearmament, energy independence, and industrials, and suggested AI adoption could mitigate the drag from Europe's demographic trends. European banks, he pointed out, have beaten the largest US tech stocks over one, three, and four years.

Regarding earnings, Wilson expects US third-quarter growth of about 27% (UBS estimates 28%), likely the peak of this cycle, while Goldman forecasts European earnings growth of roughly 22% in the second half, or 15% excluding energy firms. Though growth is decelerating at the margin, he said high nominal growth together with compressed valuations maintains a favorable setup.

His first trade is a long position in US megacap tech. He argued that hyperscaler revenue growth trails heavy capital spending by several quarters and that returns on that investment are starting to materialize. His second trade is a long position in German fiscal spending beneficiaries. German manufacturing surveys are exceeding US ones, earnings estimates for this group have increased by about 13% to 14% this year, yet the stocks have de-rated by over 20% and trade at low-teens multiples.

Going forward, Wilson pointed to US CPI as crucial for determining whether yields can halt their rise. He also sees an opportunity for a resolution in the Iran conflict before the US midterm elections, with third-quarter earnings likely to influence perspectives on the AI trade.